code of best practice on corporate governance 2013...sustainability reporting internal audit key...

Code of Best Practice on

Corporate Governance – 2013

Presented by Asite Talwatte

Co-Chairman, CA Sri LankaCorporate Governance Committee

& Managing Partner, Ernst & Young

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Code of Best Practice on Corporate Governance 2013

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Performance

Conformance

Risk &Control

Accountability &Audit

CSR

Stakeholder Relations

Code of Best Practice on Corporate Governance 2013

• Advent of Corporate Governance

• Corporate Governance Code - 2013

• Key changes in Corporate Governance Code - 2013

Outline

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Advent of Corporate Governance

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Definitions

It is the system by which companies are directed and controlled.

[Cadbury – 1992]

It influences how;

• objectives are set and achieved

• how risks are monitored and assessed

• how performance is optimized

within a framework of effective accountability

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Definitions

The Economist Intelligence Unit Limited - 2002

• Corporate governance is about promoting corporate fairness, transparency and Accountability

Organisation for Economic Co-operation and Development (OECD) – Principles of Corporate Governance, 2nd Edition 2004

• Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.

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Definitions

The purpose of corporate governance is to facilitate effective, entrepreneurial and prudent management that can deliver the long-term success of the company.”

(UK Combined Code 2012)

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Development in Corporate Governance

UK

SL

2003-Higgs

Report-Smith Review

-Revised Combined

Code

1995

Greenbury Report

1998

Hampel Report

The Combined

Code

1999

Turnbull Report

2006

Standards on Corporate

Governance -Listing Rules

2008

Code of Best Practice

on Corporate

Governance

2003

Revised Code of Best Practice on

Corporate Governance

2002

Code of Best

Practice on

“Audit Committees”

1993

Financial Sector

Reforms

1992

Cadbury Report

1997Code of Best Practice on

financial aspects of Corporate

Governance

2008

Revised Combined

Code

2012

Revised Combined

Code

2006

Revised Combined

Code

2013Code of

Best Practice

on Corporat

e Governa

nce

8

2010

Revised Combined

Code

Contents of the Corporate Governance Code - 2013

Remuneration Committee & Procedure

The level and make up of remuneration

Disclosure of Remuneration

Supply of Information

Appointments to the board

Re-Election

Appraisal of Board Performance

Disclosure of Information in

respect of Directors

Appraisal of CEO

Chairman and Chief Executive Officer

Chairman’s Role

Financial Acumen

Definitions Relating to Independence Criteria

Board Balance

Directors

Boards’ Role

Directors’ remuneration

Relations with Shareholders

Constructive use of the AGM and conduct of

general meetings

Communication with shareholders

Major & Material Transactions

Contents of the Corporate Governance Code - 2013

Consider use of votes

Evaluate Governance Arrangements

Corporate Governance Disclosures

Definitions on Related party disclosures

Risk & Internal Control

Audit Committee

Code of Business Conduct & Ethics

Disclosures

Accountability and Audit

Financial Reporting

Shareholders’ Responsibility

Carry out an analysis /seek independence advise

Participating in General Meetings

Principles of Sustainability Reporting

Sustainability Reporting

Internal Audit

Key changes in Corporate Governance Code - 2013

Board’s Role – a few additions

Reporting internal control, risk management and related responsibilities of the Audit Committees and Boards of directors.

Reporting requirements of the remuneration committees.

Role of the company secretary in Corporate Governance.

Communication with shareholders.

Main Areas of Change


Changes in Directors Independence criteria and other disclosures

Board performance evaluation checklist

Related party transactions

Disclosure and approval of major and material transactions, including those with related parties

Code of business conduct and ethics

Sustainability reporting

Main Areas of Change contd.

The Board

Board - Meetings


• The Board should meet regularly. Board meetings should be held at least once in every quarter of a financial year, in order to effectively execute board’s responsibilities, while providing information to the board on a structured and regular basis.

Boards’ Role


The Board’s role is to provide entrepreneurial leadership of the Company within a framework of prudent and effective controls which enables risk to be assessed and managed. In performing its role, the Board should be responsible for matters including:

• ensuring the formulation and implementation of a sound business strategy;

• ensuring that the Chief Executive Officer (CEO) and management team possess the skills, experience and knowledge to implement the strategy;

• ensuring the adoption of an effective CEO and Key Management Personnel succession strategy;

Boards’ Role contd.


• ensuring effective systems to secure integrity of information, internal controls, business continuity and risk management;

• ensuring compliance with laws, regulations and ethical standards;

• ensuring all stakeholder interests are considered in corporate decisions;

• recognising sustainable business development in Corporate Strategy, decisions and activities;

• ensuring that the Company’s values and standards are set with emphasis on adopting appropriate accounting policies and fostering compliance with financial regulations; and

• fulfilling such other Board functions as are vital, given the scale, nature and complexity of the business concerned.

Training and Development of Directors


When first appointed to the Board of a company, every Director should receive appropriate training.

Training should encompass both general aspects of directorship and matters specific to the particular industry/company concerned.

A Director should recognise the need for continuous training and expansion of the knowledge and skills required to effectively perform his duties.

The board should regularly review and agree the training and development needs of the directors.


Chairman & CEO; ideally posts segregated.Chairman’s Role; is to conduct meetings of Board ensuring;• The Board addresses all its roles and responsibilities.• Effective participation of both Executive & Non-Executive

Directors.• A balance of power between Executives & Non-Executives.• Views of Directors are ascertained .• The Board is in complete control of the Companies affairs and be

alert to its obligations and to its shareholders and stakeholders.

CEO’s Role; executing the strategies agreed with the Board.• If the roles are combined justify & highlight in the Annual Report.


Board Balance

• Executive & Non-Executive with no group dominating• Non Executives 1/3 the total number• A minimum of 2 or 1/3 the Non Executives should be

independent• Should include those with sufficient financial acumen

Independence (includes but not limited to below provisions)• Independent of management• Independent of a significant shareholder or employed or

otherwise associated with the significant shareholder


Independence (contd….)

• Free of material business relationships directly or indirectly• Signed annual declarations and the Board should determine

independence• Employed with the Company in the past 2 years• Close family members CEO or KMP• On the Board for 9 years• Is employed as a Director in a Company that has a Business

connection


Audit Committee

Composition; Non Executive Directors with a majority, independent Non-Executives.

Terms of Reference; at a minimum oversight on;• Preparation , presentation and adequacy of disclosures in the

financial statements• Compliance with reporting requirements in the various statutes• Internal controls and risk management procedures• Ability of Company to continue as a going concern• Independence and performance of auditors


Audit Committee (Contd…………)

Duties;• Recommending appointment, re-appointment and removal of

external auditors• Discuss audit plan, key audit issues and management response• Discussion of the Company’s annual AFS and quarterly FS• Discuss Company’s earnings, press releases and information

provided to analysts & rating agencies• Discuss risk assessment and management• Ensure sound system of internal control• Ensure an effective internal audit


Audit Committee (Contd…………)

• Assessing the company’s ability to continue as a going concern• Private meetings with management, auditors and internal

auditors• Mechanism for confidential receipt and handling of complaints on

financial matters• Assuming confidentiality of whistle blowing employees• Setting hiring policies for employees of auditors• Reporting regularly to the BOD• Determining independence of auditors• Audit Committee Report in the Annual Report

Reporting internal control, risk

management and related

responsibilities of the Audit

Committees and Boards of directors.

Internal Control


Broadly, risk management and internal control is a process, effected by a company’s board of directors and management, designed to provide reasonable assurance regarding the achievement of company’s objectives.

The Board should require the Audit Committee to ensure reviews of the process and effectiveness of risk management and internal controls, and to document to the Board and Board takes the responsibility for the disclosures on internal controls.

Internal Control –Schedule K


The Responsibilities of Directors in Maintaining a Sound System of Internal Control and a report by the Board to be contained in the Annual Report.

• the process it has applied in reviewing the design and effectiveness of the system of internal control.

• the process it has applied to deal with material internal control aspects of any significant problems disclosed in the annual report.

• acknowledgement by the Board that it is responsible for the Company’s system of internal control and for reviewing its design and effectiveness.

• disclose that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Company.

Internal Control contd.


• disclose if it has failed to conduct a review of design and effectiveness of the Company’s system of internal control.

• ensure that its disclosures provide meaningful, high level information and do not give a misleading impression.

• Where material subsidiaries, joint ventures and associates have not been dealt with in applying this guidance, as part of the group, that fact should be disclosed.

• The confirmation by the Board.

• Should be signed by the directors who signed the financial statements and the chairman of the Audit Committee.

Reporting requirements of the

remuneration committees.

Remuneration Committee


Schedule C : TOR of Remuneration Committee

The Committee shall be responsible for;

• The remuneration policy and its specific application to the CEO & Executive Directors and general application to the Key Management Personnel (KMP) below the main Board;

• The remuneration and incentive framework, including any proposed equity incentive awards including terminal benefits/pension rights for the CEO, any other Executive Directors and KMP;

Remuneration Committee contd.


Schedule C : TOR of Remuneration Committee

• Recommendations and decisions (as relevant) on remuneration and all incentive awards including any equity incentive awards and terminal benefits/pension rights for the CEO, any other Executive Directors and KMP;

• Evaluating the performance of the CEO, management development plans and succession planning;

• Reviewing/monitoring evaluation of performance of KMP and their management development and succession planning;

• Strategic human resources policies;



Schedule C : TOR of Remuneration Committee contd.

The Committee shall be responsible for;

• Effective communication with shareholders on the remuneration policy and the committee's work on behalf of the Board through a remuneration committee report;

• Recommending and ensuring that the appropriate service contracts are available for Executive Directors; and

• Determining the terms of any compensation package in the event of early termination of the contract of any Executive Director.

Remuneration Committee


Schedule D : Specimen Remuneration Committee Report

The report should cover the following disclosures

• Remuneration policy for; Basic salaries; Perquisites and benefits ;Performance bonus ;Pension entitlements ;Long Term Incentive Plan

• Shareholding guidelines (if any)

• Employee Share Schemes



Schedule D : Specimen Remuneration Committee Report

The report should cover the following disclosures

• Directors’ compensation in total and for:• Short term benefits• Post-employment benefits• Other long term benefits• Termination benefits; and• Share-based payment

• Meetings ;Number of meetings and Attendance at the meetings

• Committee Evaluation

Role of the company secretary in

Corporate Governance

Role of Company Secretary


Schedule F : Respective functions of Company Secretary in relation to;

• Board Meetings

• General Meetings

• Memorandum & Articles of Association

• Reports, Accounts and Documentation

• Corporate governance including documentation on RPTs

• Stock Exchange Requirements

• Communication with shareholders

• Other

Communication with shareholders.

Communication with Shareholders


The Board should implement effective communication with shareholders.

There should be a channel to reach all shareholders of the company in order to disseminate timely information.

The company should disclose the policy and methodology for communication with shareholders.

The company should disclose how they implement the above policy and methodology.

The company should disclose the contact person for such communication.

Communication with Shareholders contd


There should be a process to make all directors aware of major issues and concerns of shareholders, and this process has to be disclosed by the company.

The company should decide the person to contact in relation to shareholders’ matters. The relevant person with statutory responsibilities to contact in relation to shareholders’ matters is the Company Secretary or in his/her absence should be a member of the Board of Directors.

The process for responding the shareholder matters should be formulated by the Board and disclosed.

Changes in Directors Independence

criteria and other disclosures

Directors’ Independence


The board should determine whether the director is independent in character and judgement and whether there are relationships or circumstances which are likely to affect, or could appear to affect, the director’s judgement.

Definition for “Significant Shareholdings” - can be defined as a shareholding carrying not less than 5% of the voting rights of a company.

Directors’ Independence contd.


Definition for “Indirectly” - including but not limited to a partner, shareholder, director, Key Management Personnel of a body that has a Business Connection with the company.

Definition for Key Management Personnel - those persons having authority and responsibility for planning, directing and controlling the activities of the entity, directly or indirectly, including any director (whether executive or otherwise) of that entity.

Alternate Directors


If an alternate director is appointed by an independent director, the person who is appointed also should meet the criteria of independence and the provision on minimum number of independent directors also should be satisfied.

Disclosure of Information in respect of Directors


The Annual Report of the Company should set out the following information in relation to each Director:

• whether Executive, Non-Executive and/or independent Director;

• the total number of Board seats held by each Director indicating listed and unlisted Companies and whether in an executive or non-executive capacity;

Board Performance Evaluation

Checklist

Board Performance Evaluation Checklist


Schedule B : The Board Performance Evaluation Checklist

The Board should also undertake an annual self-evaluation of its own performance and that of its Committees and state how such performance evaluations have been conducted, in the Annual Report. [A.9.3]

Enhanced to include;

Has the Board identified the right compensation philosophy “to retain and motivate staff in a manner appropriate for the business”?

Has the Board identified the succession plan to ensure comprehensive staff succession - “to ensure talent availability and address expectations of high potential and high quality staff.”

Related party transactions

Related Party Transactions


The Board should adequately and accurately disclose the related party transactions in its Annual Report.

• Each related party should submit signed and dated declaration quarterly mentioning whether they have related party transactions with the Company as defined in this Code.

• It should be the responsibility of the Company Secretary to keep a record on related party transactions and make necessary disclosures accordingly.

Related Party Transactions contd.


• There should be a process to capture related parties and related party transactions. This process needs to be operationalized and related party transactions should be properly documented. Further, a report should be presented by the Audit Committee to the Board on identified related parties and related party transactions on a regular basis.

• A record/register either in hard or soft form on related party and related party transaction should be maintained by the company.

• This record should ensure that the company captures information to comply with the respective related party disclosure requirements imposed by SEC/Accounting Standards/ Auditing Standards and similar regulations.

Related Party Transactions contd.


Definition for “Related Party” and “Related Party Transaction” in line with LKAS 24 – Related Party Disclosures.

Disclosure and approval of major and

material transactions, including

those with related parties

Major and Material Transactions


Prior to a Company engaging in or committing to a ‘Major related party transaction’ with a related party, involving the acquisition, sale or disposition of greater than one third of the value of the Company’s assets or that of a subsidiary which has a material bearing on the Company and/or consolidated net assets of the Company, or a transaction which has or is likely to have the effect of the Company acquiring obligations and liabilities, of greater than one third of the value of the Company’s assets, Directors should disclose to shareholders the purpose and all material facts of such transaction and obtain shareholders’ approval by ordinary resolution at an extraordinary general meeting. It also applies to transactions or series of related transactions which have the purpose or effect of substantially altering the nature of the business carried on by the Company.



Each Company may determine its own policies in the formulation of such a Code, but all Companies should address the following important topics in their respective Codes:• conflict of interest;• bribery and corruption;• entertainment and gifts;• accurate accounting and record-keeping;• corporate opportunities;• confidentiality;• fair dealing;• protection and proper use of company assets;• compliance with laws, rules and regulations (including insider trading

laws); and• encouraging the reporting of any illegal or unethical behavior. (D.4.1)



Sustainability is a business approach that creates long term stakeholder value by embracing opportunities and managing risks derived from economic, environmental and social developments and their potential implications and impacts on the business activities of the entity.

Principles of Sustainability Reporting

Economic sustainability

The Environment

Labour Practice

Society

Sustainability Reporting contd.


Principles of Sustainability Reporting contd.

Product Responsibility.

Stakeholder identification, engagement & effective communication.

Sustainable reporting and disclosure should be formalized as part of the Company’s reporting processes and take place on a regular basis.

Thank you.

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